How do you solve a problem like Air Macau? (Part I)

The premises for Air Macau’s business model has been taken away, what should the airline do to survive a rapidly changing operating environment?

Air Macau is in trouble.

The net asset value of the airline stood at a negative 91.2 million Chinese Yuan (USD $13.3 million) at the end of last year, to avoid bankruptcy according to Macau laws, shareholders had to pump a 431.2 million Chinese Yuan emergency fund into the airline to keep it float. 

The situation is not likely to improve, if not deteriorate, as the Air Macau’s  main revenue source – cross Taiwan Strait traffic between Mainland China and Taiwan will no doubt shrink significantly, as direct air link between the two sides have been established since 2008 and continue to grow rapidly in 2009.

A little background

In 1949, after suffering defeat in the Chinese Civil War, the KMT party led by Chiang Kai-shek fled mainland China and retreated to Taiwan Island, where it continued its rule as the Republic of China, while the winning communist party established the People Republic of China on the mainland.

Fearing an invasion from the communist party, the KMT banned direct flight, mail and cargo transportation with the mainland. Passengers traveling to mainland will have to go through a third point, usually Hong Kong or Macau.

However, in the past 20 years, as the economy in the mainland takes off, traffic volume and frequency across Taiwan Strait grew exponentially. Since 1980, more than 53 million visits to the mainland by Taiwan residents have been recorded, more than 2 million Taiwanese live in Beijing, Shanghai and other mainland cities permanently for business and personal reasons. Further more, Taiwanese investment in the mainland has reached USD $100 billion since 1990, resulting in huge business travel demand between the two sides. But travelers between Taiwan and China have to stop in Hong Kong or Macau and change planes, a requirement that adds four hours to what could be a one-hour flight across the 100-mile-wide Taiwan Strait and is seen as a costly obstacle to further economic integration.

About Air Macau

Air Macau was established in 1994 to take advantage of the cross Taiwan Strait travel demand, if fact, more than 70% of its revenue comes from transporting passengers between Taiwan and Mainland China via Macau.  It offers a one-plane service for passengers travelling between the two sides, although they must complete a brief transfer procedure in the Macau International Airport and wait for about 30 minutes in the departure lobby, passengers can board the same plane once again and continue to their destinations. The airline will also assist Taiwanese passengers to obtain mainland entry permit if required.

Ownership info

Air Macau Route Network

Air Macau Fleet (Credit: Wikipedia)

Financials (Latest data available)

Reputation / Brand Equity

Air Macau is not an inspiring airline when it comes to its brand image, unfortunately.

Here are some passenger reviews found on airlinequality.com

“Economy class was full, seats were cramped but bearable for the 1.5 hr flight. Food was poor. MFM-TPE sector had no boarding bridge so has to take the bus to the aircraft.”

“Shanghai to Taipei The flight was delayed for more than 3 hours without explanation. Eventually, we were informed to board an A300. It was an awful and old aircraft and full of terrible smell, and the air conditioning was not functioning properly. This airline does not pay attention to flight safety – I consider Air Macau is the worst airline I have ever taken.”

“Macau-Shanghai. Business Class. Full cabin. Drinks, meal, tea and coffee all served and cleared away 45 minutes after take-off. Why the rush? I filled in a Customer Comment card requesting a reply but never received it. I definitely recommend avoiding Air Macau – it is worth going to HKG just to use DragonAir – 1,000 times better than Air Macau.”

The problem: Political landscape changed & the cash cow is dying

In spite of being a mediocre airline with few endearing attributes, Air Macau has survived so far by relying on the cross-strait traffic created by political barriers between Taiwan and the mainland. However, things are changing, trade and transit ties have improved quickly since Beijing-friendly Taiwan President Ma Ying-jeou took office in May 2008.

As of July 2009, seven mainland airlines, including China Southern, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, China Eastern Airlines and Shandong Airlines have set up offices in Taiwan and started direct flights between mainland China and Taiwan. At the same time, Taiwan based China Airlines, Uni Airways, TransAsia Airways have started their own direct flights to mainland China as well.

As a result, travellers now enjoy shorter travel time, lower ticket prices and more frequency than ever before to fly across Taiwan Strait.

Therefore, Air Macau is in a dire situation: 70% of its revenue comes from travellers between Taiwan and Mainland China, however, there is little, if any reason for most people to transfer through Macau after Aug 31, 2009, when airlines from both sides of the Taiwan Strait started or increased their own direct flights. The premises at the core of its business model has been taken away, how does this airline survive? or will it have no choice but fade away? 

In part II of this post, I will examine the obstacles and opportunities in Air Macau’s operating environment, and propose a few strategic directions that Air Macau might take to rethink and revitalize its business model. (… to be continued. )